The New York TimesThe liberal press of the 1930s criticized the appointment of Joseph P. Kennedy as the first chairman of the Securities and Exchange Commission.
Richard E. Farley is a partner in the leveraged finance group of the law firm of Paul Hastings and is writing “The Crisis Not Wasted – The Creation of Modern Financial Regulation During F.D.R.’s First Five Hundred Days,” a book on the creation of modern financial regulation during President Franklin Roosevelt’s first term of office.
Much has been said about the unfinished business that Mary L. Schapiro will leave behind as she steps down as chairwoman of the Securities and Exchange Commission after nearly four years.
But it did not have to be this way. Looking back to the early days of the S.E.C. in the 1930s shows that a wholesale, sweeping overhaul can be accomplished quickly if the right leadership is installed. And it would behoove President Obama to learn from the lessons of history as he seeks out the next head of the nation’s principal securities market regulator.
To her credit, Ms. Schapiro has made considerable progress in shoring up the reputation of an agency battered by the missed Bernie Madoff fraud and its perceived impotence during the Lehman collapse and subsequent financial crisis. Yet some of the big changes demanded as a result of the 2008 financial crisis are still to be undertaken.
The Dodd-Frank Act became law on July 21, 2010. The keystone market reform under Dodd-Frank, the Volcker Rule, which is intended to prevent banks from making certain kinds of speculative investments, was required under the law to become effective on July 21, 2012. A draft rule was issued by the S.E.C. and the other federal financial regulators on Oct. 11, 2011, with a comment period ending in February 2012.
But here we are, four months after the deadline, with no final Volcker Rule, and not even a definitive timeline for when one will be issued. The best guess is it will be completed sometime in the first quarter of 2013.
We are told the reason for this delay is the complexity of separating the proprietary trading and hedge fund operations of the banks, which the rule generally prohibits, from the rest of the banks’ businesses. Some of this delay is also the result of heavy lobbying by Wall Street on the rule itself.
This is hardly the first time the S.E.C. has faced opposition from Wall Street over changes. In fact, from the very beginning of its creation, businesses were hostile to what they saw as overregulation.
Yet, within two years of his inauguration, Roosevelt had passed a financial reform package that included the Banking Act of 1933, commonly known as Glass-Steagall, which separated all of investment banking from commercial banking and established the Federal Deposit Insurance Corporation and nationwide deposit insurance; the Securities Act of 1933, requiring registration of all public offerings of securities; and the Securities Exchange Act of 1934, which regulated the securities exchanges and securities traded thereon and established the Securities and Exchange Commission to oversee these securities laws.
In its first year of its existence, the S.E.C. organized itself, established its branch offices, created rules for the regulation of securities exchanges and required the registration of securities traded on those exchanges. It also adopted rules governing impermissible activities in trading those securities, and determined the reports that companies and their officers and directors would need to file with the commission.
A large percentage of these original rules and forms would be recognizable to market participants today – nearly 80 years on – as the fundamentals of the S.E.C. rules. Even the filing forms are not fundamentally different. This financial regulatory genesis dwarfs the task of completing the Volcker Rule.
How was the S.E.C. able to accomplish all that in just one year? Much of the credit must go to the man Roosevelt chose as the first chairman of the S.E.C., and to Roosevelt himself for having the courage to choose him.
After the Securities Exchange Act was signed into law on June 6, 1934, Roosevelt had to choose the members of the new Securities and Exchange Commission and, most important, its chairman. The overwhelming favorite of the reformers – and the safe political choice – was Ferdinand Pecora, the firebrand lead counsel for the Senate Banking Committee who grilled the titans of Wall Street during hearings into the stock market crash and its aftermath and uncovered shocking market abuses.
Roosevelt did not make the safe choice. Instead, he chose Joseph P. Kennedy, a stock market operator, and some would say manipulator, who had made a fortune on Wall Street during the great bull market of the 1920s, got out just in time before the 1929 crash and made a second fortune playing the market all the way down.
The liberal press was apoplectic. At the time, The New Republic wrote: “Had F.D.R.’s dearest enemy accused him of an intention of making so grotesque an appointment as Joseph P. Kennedy to the chairman of the S.E.C., the charge might have been laid to malice. Yet the president has exceeded the expectation of his most ardent ill-wishers.”
Kennedy turned out to be Roosevelt’s best appointment to any of the New Deal agencies. In his tenure as chairman, Kennedy created an agency that, rare among the New Deal agencies, did precisely what it was created to do and survives to this day.
“His accomplishment was unmistakable. He had taken a law that seemed almost unworkable, and had administered it so as to reassure business, simplify corporate borrowing, and boost investor confidence,” wrote the historian Richard Whalen. “To his successor as S.E.C. chairman, 36-year-old James Landis, he turned over an experiment that had achieved the stature of an institution in the amazingly brief span of 431 days.”
As President Obama considers a replacement for Ms. Schapiro, he would serve himself, the markets and the country well to consider a successful market professional from Wall Street, preferably someone who, like Joseph Kennedy, is not concerned with offending interested constituencies (or with the “career consequences” thereof).
Instead, the president should choose a person principally concerned with leaving a legacy of public accomplishment that will be a credit to his or her family name. That sort of individual gives us the best chance of the prompt, decisive action that will be necessary to complete the S.E.C.’s unfinished business.